San Francisco trial weighs breach-of-trust claim by McClatchy family member

A San Francisco court is hearing a long-standing complaint by a McClatchy family member that the Sacramento company’s former chairman and trustees mishandled a family trust with the 2006 takeover of newspaper chain Knight Ridder Inc. for $4.4 billion.

The breach-of-trust allegation dates back to a suit filed in 2012 in San Francisco Superior Court by Carlos McClatchy, son of James B. McClatchy, the firm’s former board chairman and publisher. James McClatchy died in 2006.

The James B. McClatchy Trust was set up by longtime company President Eleanor McClatchy in November 1974. After James B. McClatchy’s death, Carlos McClatchy became ​an income beneficiar​yof the trust.

John Poulos, a Sacramento attorney who is part of a team of lawyers representing the past and present McClatchy officials, said Eleanor McClatchy’s primary concern was that McClatchy remain “a free and independent company. She didn’t want the company to be bought by another larger newspaper company … Those wishes have been honored and as far as I know will continue to be honored.”

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Poulos also noted that “at the time of the Knight Ridder transaction, Jim McClatchy was still alive and the sole income beneficiary” (of the trust) and favored the Knight Ridder deal. “He knew what he was doing. He wanted to spread McClatchy-style journalism to a greater audience.”

Carlos McClatchy alleges that top company officials failed to properly administer the trust and preserve its value, and the subsequent decline in McClatchy common stock’s value ended dividend payments and severely damaged the trust’s assets.

Poulos said citing the company’s suspension of dividends in 2009 ignores that fact “that there was this thing called a financial crisis” at the time and “other newspaper companies were suspending dividends.”

McClatchy, publisher of The Sacramento Bee and 29 other newspapers, declined to comment on the ongoing legal proceedings.

The suit names current and former trustees and former McClatchy chairman and CEO Gary Pruitt, who led the company’s efforts to acquire the Knight Ridder chain, citing an opportunity to buy nationally prominent newspapers at a relatively bargain price.

That optimism fell with the onset of the recession, a decline in print advertising revenue and the rapid growth of the internet. At the same time, McClatchy had to put major efforts into managing its debt and saw its stock price fall.

Pruitt left the company in 2012 to become president and chief executive officer of the Associated Press.

McClatchy’s recent efforts to manage debt have included selling real estate assets throughout the chain to amass cash. Just last week, McClatchy finalized the sale and leaseback of The Sacramento Bee building at 2100 Q St. and the sale of The Kansas City Star’s office building. Combined, the transactions will net the company nearly $57 million.

McClatchy said last week that its net debt had been reduced to $713 million.